Moody's upgrades Macrotech to B2; outlook positive

16 Mar 2022 , 08:45 AM

Moody’s Investors Service has upgraded to B2 from B3 the corporate family rating (CFR) of Macrotech Developers Limited (MDL) and the backed senior secured rating of Lodha Developers International Limited’s USD bonds, which are guaranteed by MDL.

The outlook on the ratings remains positive.

“The upgrade of MDL’s ratings to B2 from B3 reflects the company’s improved liquidity following the partial prepayment of its $225 million backed senior secured bonds due in 2023, as well as a continued recovery in operating performance both at India and London,” says Sweta Patodia, a Moody’s Analyst.

“The positive outlook reflects our view that MDL’s credit profile could improve further if company is able to demonstrate a track record of strong operating performance while adhering to its committed financial policies,” adds Patodia.

On 14 March, MDL prepaid $170 million of its $225 million backed senior secured notes due March 2023 out of sales collections from its London projects. The company expects to repay the balance $55 million by June 2022. Of the $425 million (GBP328 million) of inventory financing that was outstanding at Grosvenor Square (GSQ) as of November 2021, MDL has repaid around $180 million in January 2022.

These debt repayments not only strengthen the company’s liquidity but also reflect a sustained recovery in operating performance at its London projects, which had thus far been a drag on its credit profile.

In addition to the $55 million of outstanding bonds, the company now has around $240 million of loan outstanding at Grosvenor Square, which is due for repayment in January 2026. Against this, the company has around $285 million of unsold inventory and $170 million of pending collections (after considering the $55 million bond repayment), thus providing a debt-to-asset cover of around 53% for the loan.

Operating performance in India also remains strong. MDL achieved operating sales of INR26 billion for the quarter ended December 2021, which was the highest since at least June 2019. Collections during the quarter also remained healthy at around INR21 billion.

Moody’s expects MDL’s operating sales and collections to remain buoyant over the next 12-18 months as pandemic-related restrictions ease and rising vaccination rates drive up economic activity. Structural changes in customer preferences toward bigger homes will also support housing demand. MDL is well placed to capitalize on these positive industry trends, given its stock of ready inventory and its strong launch pipeline over the next 12 months.

Liquidity at MDL’s Indian operations has also improved, following debt reduction through inorganic measures taken by the management. As of December 2021, debt at the company’s Indian operations was around INR99 billion, reflecting a 38% reduction from debt levels as of March 2021.

In November 2021, MDL raised around INR40 billion through a qualified institution placement of its equity shares. Proceeds from the equity offering will be used to fund future growth, which will allow the company to use its internal cash flow generation for further debt reduction.

Consequently, MDL’s leverage, as measured by debt/homebuilding EBITDA (after consolidating its London operations), is expected to be around 3.0x by March 2022, compared with 6.6x as of March 2021.

MDL will be raising another tranche of equity over the next 18-24 months to comply with listing regulations in India, which require a minimum public float of 25% within three years of listing. This could support further improvement in its credit metrics.

In terms of environmental, social and governance (ESG) factors, MDL is exposed to social and governance risks. Beyond pandemic-related disruptions, the company is exposed to changes in demographic and societal trends that may impact housing demand. However, given India’s favorable demographics, housing demand will likely remain buoyant, mitigating this risk to a large extent.

In terms of the governance risk, Moody’s expects MDL to remain exposed to risks from its concentrated ownership, given that its promoter group continues to hold 82.2% of the company. In addition, the company’s dividend policy might change following its public listing. Payment of dividends, if substantial, will reduce MDL’s free cash flows and slow down its likely deleveraging.

Moody’s could upgrade the ratings if the company demonstrates a track record of strong operating performance while maintaining strong credit metrics and good liquidity.

Metrics that would support an upgrade include adjusted debt/homebuilding EBITDA below 4.0x and adjusted homebuilding EBIT/interest expense above 3.0x on a sustained basis.

Moody’s could revise the outlook to stable if MDL’s operating performance sharply declines from current levels or if its liquidity profile weakens.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Macrotech Developers Limited is the largest real estate developer in India by sales of residential apartments. The company is focused on residential developments in the Mumbai Metropolitan Region, with some projects in nearby Pune. It is listed on the Indian stock exchanges, and its promoter group, comprising the Lodha family and their respective investment vehicles, own a stake of around 82.2% in the company.